4 CHAPTER Internal Analysis: Resources, Capabilities, and Activities McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Instructor: Dr.Gehan Shanmuganathan

LO 4-1Distinguish among a firm’s resources, capabilities, core competencies, and firm activities. LO 4-2Differentiate between tangible and intangible resources. LO 4-3Describe the critical assumptions behind the resource-based view. LO 4-4Apply the VRIO framework to assess the competitive implications of a firm’s resources. LO 4-5Identify competitive advantage as residing in a network of firm activities. LO 4-6Outline how dynamic capabilities can help a firm sustain competitive advantage. LO 4-7Identify different conditions that allow firms to sustain their competitive advantage. LO 4-8Conduct a SWOT analysis. 4-2

ChapterCase 4 From Good to Great to Gone: Circuit CityCircuit City  A GREAT performer from 1982 – 2000  World-class logistics & customer responsiveness  4S: service, selection, savings, & satisfaction  6 times better investment than GE under Jack Welch! Bankruptcy in fall of 2008!Bankruptcy in fall of 2008!  Outflanked by firms like Best Buy and Amazon 4-3

INTERNAL ANALYSIS: Inside the Firm Comparing two firms in same industry: Internal focusComparing two firms in same industry: Internal focus  Core Competencies  Unique strengths deep inside that differentiate a firm  Can drive competitive advantage  Strategic Fit  Internal strengths change with external environment 4-4

EXHIBIT 4.1 Creating Strategic Fit to Leverage Internal Strengths Creating Strategic Fit to Leverage Internal Strengths 4-5

Internal Analysis: Link to Superior Performance Combination of Resources & CapabilitiesCombination of Resources & Capabilities  Builds core competencies  Competencies drive activities  To transform inputs into goods & services  Activities can produce competitive advantage & performance  Reinvest profits from superior performance  Hone and upgrade core competencies 4-6

EXHIBIT 4.2 Linking Resources & Capabilities to Firm Performance Linking Resources & Capabilities to Firm Performance 4-7

THE RESOURCE-BASED VIEW Tangible ResourcesTangible Resources  Visible, physical attributes Intangible ResourcesIntangible Resources  No physical attributes Google ExampleGoogle Example  Tangible resources valued at $5 billion  Intangible brand valued at over $100 billion  Googleplex has BOTH tangible and intangible aspects Competitive Advantage More Likely…..Competitive Advantage More Likely…..  From INTANGIBLE resources 4-8

Two Critical Assumptions in RBV Resource heterogeneityResource heterogeneity  Bundles of resources and capabilities differ across firms  Southwest Airlines & Alaska Airlines have different resources  SWA – Higher employee productivity – Higher employee productivity –Informal organization, pilots help load luggage Resource immobilityResource immobility  Resources tend to be “sticky” & don’t move easily  Southwest Airlines sustained advantage  Several decades superior performance  Competitors have unsuccessfully imitated SWA model 4-9

EXHIBIT 4.5 Applying RBV: Decision Tree Competitive Implications 4-10

THE VALUE CHAIN Primary ActivitiesPrimary Activities  Add value directly in transforming inputs into outputs  Raw materials through production to customers Support ActivitiesSupport Activities  Indirectly add value  Provide support to the primary activities  Information systems, human resources, accounting, etc. Managers can see how competitive advantage flows from a system of activitiesManagers can see how competitive advantage flows from a system of activities 4-11

Dynamic Strategic Activity Systems A network of interconnected activities in the firmA network of interconnected activities in the firm Evolve over time – external environment changesEvolve over time – external environment changes  Add new activities & upgrade or remove obsolete ones Vanguard ExampleVanguard Example  A global investment firm - $1.4 trillion managed assets  Emphasis on low customer cost and quality service –Among the lowest expense ratios in the industry (0.20%)  Updated the activity system from 1997 to 2011  New customer segmentation core  Two new support activities  Permits customized offerings: long-term and more active traders 4-12

EXHIBIT 4.8 Vanguard Group’s Activity System 2011 Legend Core Support 4-13

HOW TO PROTECT A COMPETITIVE ADVANTAGE 1.Better Expectations of Future Values  Buy Resources at a low cost  Real Estate Development - highway expansion 2.Path Dependence  Current alternatives are limited by past decisions  U.S. is the ONLY industrial nation not on the metric system  Honda’s core competency in gas engines took decades to build 4-14

HOW TO PROTECT A COMPETITIVE ADVANTAGE 3. Causal Ambiguity  Cause of success or failure are not apparent  Why has Apple had such a string of successful products? –Role of Steve Jobs’ vision? –Unique talents of the Apple design team? –Timing of product introductions? 4. Social Complexity  Two or more systems interact creating many possibilities  A group of 3 people has 3 relationships  A group of 5 people has 12 relationships 4-15

THE SWOT ANALYSIS Conduct a SWOT after external and internal analysis completedConduct a SWOT after external and internal analysis completed SWOT combines external and internal analysisSWOT combines external and internal analysis  Internal Strengths and Weaknesses  From VRIO framework  External Opportunities and Threats  From PESTEL or competitive forces analysis (Ch. 3)  Leverage internal strengths to exploit external opportunities  Achieving such a dynamic fit yields sustained competitive advantage 4-16